US Treasuries under pressure as EU debt risk eases

With Euro event risk abating has US yields backing up, especially further out the curve. The 10/30’s spread (+107) has widened the most in three-months as signs the Euro debt crisis may be stabilizing, reduced demand at last weeks auctions for the product. The US long-bond yield (+3.13%) has rallied from the lowest level in a month as both Greece and Italy have taken steps over the weekend to shore up new governments and address their budget and sovereign debt problems. This has reduced the demand for safer haven assets. With last Friday being a US holiday the fixed-income markets has some catching up to do, especially after the proactive political measures taking place this weekend.

Last week’s US auctions received mixed reviews. The three-year notes attracted the highest demand on record, boosted by investors seeking a refuge from Europe’s sovereign debt problems. However, as the week progressed and with US yields plummeting in response to Italian yields ballooning, the risk reward for owning US product at such low levels was not attractive and lead to two “tepid” longer dated auctions. The $24b 10-year sale drew a yield of +2.03%, compared with a yield of +2.016% just before the sale. The bid-to-cover ratio was 2.64, the lowest in two-years, compared to 3.12 from the past eight auctions. On November 10, the $16b 30-year sale of bonds drew a yield of +3.199%, compared with the average forecast of +3.148%. The bid-to-cover ratio was 2.40 compared with an average of 2.68.

Investors note that the Fed is having no problem finding demand for its short-term bonds as it focuses further out the curve. This is a sign that the strength in the economy seen last month may be ‘short’ lived. Growing demand for shorter-maturity suggests that investors remain concerned that EU sovereign debt crisis may worsen and this despite last month’s US indicators revealing something different.

Italy has an important 5-year auction Monday morning and the ECB presence is expected. If so, US longer dated yields should ease further. Currently, the market is a better seller of product on rallies.

The Nikkei closed at 8,514 up+14. The DAX index in Europe was at 6,057 up+189; the FTSE (UK) closed at 5,545 up+100. US indices remained in positive territory with the Dow at 12,153 up+259.


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    Dean Popplewell

    Dean Popplewell

    Vice-President of Market Analysis at MarketPulse
    Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
    Dean Popplewell